Josh Barro Calls for Tax Increase

Josh Barro, the Walter Wriston fellow at the center-right Manhattan Institute, asserts that in 2013, "closing the fiscal gap will, and should, involve a significant tax increase....Orszag is right that a tax increase is necessary....I agree with Orszag's premise that the Clinton-era tax rates on earned income are acceptable."

I think his reasoning is flawed. He writes:

keeping current tax policies in place (aside from temporary tax cuts in the stimulus package) would bring in federal revenues of just 18% of GDP over the next decade.

For comparison, that's below the 19% of GDP revenue target in Rep. Paul Ryan's "Roadmap" fiscal reform plan, which nonetheless requires sharp entitlement cuts to achieve budget balance. It's also a bit below the postwar average of federal tax receipts, even though demographic changes and rising health care costs have made entitlement programs structurally more expensive-not entirely in ways that could or should have been avoided.

CBO's 10-year federal spending projection is 23.3% of GDP, but the figure rises to 23.8% if you patch the AMT and extend the Bush tax cuts, due to increases in net interest. Federal revenues at 18% of GDP are simply too low to sustainably fund a politically plausible set of spending policies, even in a scenario where Washington politicians suddenly become serious about entitlement reform.

I don't see the logic of raising tax rates to meet some target of tax-revenue to GDP. If the private sector economy grows, the government doesn't necessarily have to grow to keep up with it. In fact, the government could shrink as GDP grows, as prosperity means fewer people need help from government programs. Certain government costs are fixed — we have one president and nine Supreme Court Justices, no matter how large the GDP is. If Mr. Barro, and Mr. Orszag, want to go back to the Clinton-era tax rates, why not also go back to the Clinton-era federal spending levels — not as a percentage of GDP, but in real terms? After all, most taxpayers don't earn their wages as a percentage of GDP, but in dollars.

At the "acceptable" Clinton-era rates Mr. Barro recommends, the top federal rate was 39.6%, much higher than the 28% top rate that applied in 1988, 1989, and 1990, and higher than the 35% rate that now obtains. Add in the state and local income taxes that apply in New York City, and the government winds up taking about half of a taxpayer's income. Mr. Barro may find that "acceptable," but polls on the issue show that most Americans disagree with him, thinking the appropriate share for the government is lower.

The Manhattan Institute has certainly built up a lot of credibility over the years on tax questions, and Mr. Barro's voice is just one among a variety there on tax issues. It does strike me as a newsworthy indicator of some of the internal tensions on the right between tax-cutters and deficit hawks. The supply-side view has been that it isn't a zero sum game and that it's possible to grow your way out of the problem.